The Telegraph
Since 1st March, 1999
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Reality check on market dream run
- Risk count on property, stock loans goes up

Mumbai, July 26: In a move to address concerns of a real estate bubble and runaway stock prices, the Reserve Bank of India (RBI) today increased the risk weightage on loans that banks give for investment in commercial estate and equity market by 25 basis points to 125 per cent.

Following this, banks are likely be more cautious about the way they lend to the two areas and could even insist on a higher collateral. So, loans against shares or debentures could be harder to come by in the days ahead.

The central bank said commercial real estate exposure of banks will include loans advanced directly or non-funds based assistance through secured or unsecured mortgages.

The commercial real estates, it said, cover office buildings, retail space, multi-purpose commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction.

Further, investments in mortgage-backed securities and other securities exposures backed by commercial real estate exposures will also be covered under the enhanced risk weightage.

The RBI’s move comes after its earlier one in the mid-term review of the annual policy statement for the year 2004-05 in which the risk weights for banks on housing loans, which are fully secured by mortgage or residential properties, extended to individuals by banks and investments in mortgage backed securities (MBS) of housing finance companies, recognised and supervised by National Housing Bank was increased to 75 per cent from 50 per cent.

In recent months, the real estate prices in the Metros and especially in the city of Mumbai has seen a major upswing in prices which experts say would be unsustainable. The RBI has already tightened the FCCB norms as they are worried that the money raised abroad is actually flowing into the real estate sector.

The NTC land sale is a case in pointer as every bid has seen a new record benchmark being set. Deepak Parekh, HFDC chairman has on occasions pointed out to a “bubble” in the making.

Although, this time RBI governor, the growth of real estate loans compared to previous year is almost 112 per cent, from Rs 5500 crore to a little over Rs 12000 crore.

The bank also has decided to increase the risk weight for credit risk on capital market exposures from 100 per cent to 125 per cent.

It means that direct investment by a bank in equity shares, convertible bonds and debentures and units of equity oriented mutual funds as well as advances against shares to individuals for investment in equity shares including initial public offerings and employee stock options, bonds and debentures, units of equity oriented mutual funds, etc.

The apex bank has also decided that secured and unsecured advances to stock brokers and guarantees issued on behalf of stock brokers and market maker.

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